33% of 5.88 lakh unsold under-construction units in the luxury segment – 49% in MMR – will not benefit immediately

Just when the real estate industry was preparing to give the budget a complete thumbs down, the finance minister sprung a surprise ‘bonanza’ for the sector in the last 10 minutes of his speech. Or so it seemed.

Without a doubt, affordable housing gained amidst what was essentially a mass-appeal budget. However, it was the extension of tax relaxation on notional rent for unsold inventory for another year that cheered developers.

However, under closer scrutiny, it is unlikely to benefit a majority of them as on date.

Anti-climax for developers

Basically, the new tax relaxation on notional rent paid by developers benefits unsold ready-to-move-in units. As per earlier norms, after one year of project completion, the builder had to pay taxes on notional rent on flats to the respective state government. This period has been extended to two years, and unsold units in any new projects launched from here onward will get the same two-year tax exemption.

The additional tax-free year effectively gives developers more time to handle unsold ready inventory. After the initial euphoria, it is ironic that only a handful of them will actually benefit from this new rule as on date.

ANAROCK data reveals that the current unsold stock across the top 7 cities is 6.73 lakh units, of which merely 85,000 are ready-to-move-in. Moreover, of this ready stock, only 63,000 units can avail the benefit of the new tax relaxation on unsold inventory. The remaining 22,000 ready units have been completed before 2017, which means that they will still have to pay taxes on notional rent.

Anti-climax for buyers

There will also be some setback to homebuyers considering ready-to-move options. They may no longer get heavy discounts from builders, who will now prefer to hold on to their unsold stock for another year rather than engaging in distress sales.

The tax on notional rent on ready-to-move-in properties after one year of their completion was an additional cost to builders who were already reeling under the liquidity crisis. This is why several builders preferred to sell their ready units at discounted rates rather than holding on to them and paying taxes on notional rent.

Thus, while this new tax exemption will benefit some developers, buyers may have less power to negotiate on their properties.

Among the top 7 cities, MMR has the maximum luxury units with nearly 49% of the total unsold luxury stock currently in various stages of construction. Given that there is relatively subdued demand for luxury projects right now, the extended tax-free period will not really help builders developing luxury projects.

To this effect, the Budget, in reality, failed to address the larger woes of builders. Against this sombre background, the liquidity crunch post the NBFC crisis continues to cast a shadow over the immediate and mid-term prospects of the real estate industry.